Ulta put up a decent quarter, but it was weak relative to two years of absolute blowout earnings religiously quarter after quarter. Revenue was up 12% in the quarter, decelerating from last Q up 18%. Reported EPS of $6.88 vs the Street at $6.82, but that included a $0.14 tax benefit. In other words, the company that ‘never misses’ just missed the quarter. Comp sales were up 9.3%, in-line with prior guidance the company had given – though we think the exit rate was well below 9% given how traffic growth eroded throughout the quarter. On the call management said comps would be up HSD in 1H and moderate in the back-half of the year. While revenue beat by shy of $300mm, the company only raised full year revenue guidance by about $50mm, implying significantly slowing growth as the year progresses. Transactions for the quarter were up 11%, average ticket was down 1.5% while ASPs were up, indicating fewer units were purchased and lower cost units were purchased. Management said that mass outgrew prestige again this quarter, but it would not make the inference that it was due to trade down. Said it was due to impressive newness on the brands’ part, specifically calling out elf and La Roche Posay. Fair enough, we know elf put up impressive growth earlier this week, BUT we can’t totally ignore that trade down is occurring. Aside from existing brand strength this quarter, Ulta added and grew brand selection, adding brands like Bubble, Beauty Counter, and Natasha Denona, while expanding the MAC offering into more stores. The company also saw some benefit from the Target partnership with Other Revenue up $19mm, also including increased credit card revenues.
Gross margins for the quarter were down 10bps YY, no real change from the prior quarter. Operating margin was down 190bps in the quarter, a weakening from last Q that was flat to the prior year. The biggest change in company guidance came at the operating margin line. Updated range is 14.5-14.8%, down from 14.7-15%. We think next year the margin level is 13-14%. This is mainly due to the increased level of promotions as well as an increased level of shrink. Initially management expected shrink to moderate through Q1 and the remainder of 2023, but that was not the case. The company is working on new measures to protect against shrink, but these measures will ultimately increase costs – additional store employees and security, as well as new displays to make it more difficult to steal.
The 2H moderation management guided to syncs up with when KSS/Sephora rollout will be complete. On the KSS call this week, management said the remaining 250 stores will be opening in June and July. Ulta has seen outsized growth from the category, and that’s not sustainable. There are already cracks in the market; slowing growth of the industry and popular brands (sold at Ulta) have begun slowing. With the near-impossible re-opening comps from the past two years, the Sephora threat at KSS, brands going more direct-to-consumer, lapping major brand introductions and a 5% price increase put in place in 2H of last year, and this increased shrink headwind we’ll see a sharp comp deceleration and pressured margins. While the stock traded down into the print, its down another 8% after hours. We’d argue it should be down more. We think that the party is over at ULTA. It cracked this quarter, and should show its true colors in 2H when Sephora competition is in full swing and it laps its price increase, while the category cools. We think this stock will be closer to $300-$350 over the next 12-18 months. Reiterating this Best Idea Short.
For details on our competitive analysis around how ULTA stores comp down when a Sephora opens up next door at a Kohl’s, see our presentation from last month. Video Replay Link CLICK HERE
